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Crypto? It’s only illegal if we say it is

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I haven’t blogged about cryptocurrencies and blockchain for a while, as it’s been a bit too much for a while. There’s massive coverage everywhere, but what’s the reality? The reality is that a lot of this is nascent change. There are young tycoons making millions, whilst naïve bandwagoners are losing millions. From a $20,000 end of 2017 high, bitcoin has tanked to just over $6,000 today, and people everywhere are looking to ICO when they don’t really know what it is or what it means.

For me, I have HODL’d a bit, invested a bit, lost a bit and made a bit. Or is that a byte? Whatever, it is, I have five areas of focus in these markets right now:

  • Cryptocurrencies;
  • Blockchain;
  • Distributed Ledger Technology (which is not the same as blockchain);
  • ICOs; and
  • Cryptoderivatives.

These are five major areas of activity and complexity that combine all the hardest parts of capital markets and technologies. For many of us, investment banking is a weird alien land with a language all of its own. CDOs, HFT, FX, ETF, OTC, EPS … the list goes on and, unless you’re a specialist, it’s weird. Then we add to this the complex world of tech, which also has its own code – HTML, GUI, SSL, HTTP, RFID, NFC, RPA, AI, API and more – and you’ve got a melting pot of confusion.

Give all of this wrapped up in a you just cannot lose boiler room sales pitch, and you’ve got masses of people investing in stuff they have no idea what it is or what it means, and being fleeced big time. Add on to this that none of it is regulated, apart from the power of the network, and I worry. I worry, as people ask me all the time what to do, and I have no idea.

I personally don’t believe bitcoin will succeed, but I buy into Ethereum. I personally don’t agree with most bankers, who say bitcoin bad but blockchain good:

Swiss financial services giant UBS Group may not be a fan of bitcoin but CEO Sergio Ermotti believes blockchain, the technology behind cryptocurrencies, is "definitely an opportunity" in the long term.

"It's almost a must. The freeing up of resources to become more efficient will come through technology and blockchain is a great way to allow us to … reduce costs," Ermotti told CNBC's Michelle Caruso-Cabrera last Monday.

And I totally disagree with all of those confused people who say bitcoin is just for money laundering:

“The only thing I can really figure out the usage of it is that it’s good for speculation, and it’s good for money laundering.” Steve Eisman, veteran Wall Street investor

As I think that cryptocurrencies have a major opportunity to change the world tomorrow. In particular, as I’ve blogged before, a global network demands a global currency to enable fast and free exchange of value, but what is that currency? Is it bitcoin? I don’t think so as it has too many technology failings today. It’s not scalable – seven transactions per second? – and it’s not free – mining means the average bitcoin cost per transaction is $1 today … but it can be as much as $1,000 dependent upon the blocks available on the network at the time of processing. That’s not something fit for purpose.

Equally, I’m not a fan of markets that are unregulated. I’ve been involved in several start-up cryptos and ICOs that rapidly unravel and demonstrate little resilience or robustness. I lost money on MtGox and definitely don’t believe in cryptocurrencies that have billions in market capitalisation but were invented as a joke. In other words, these markets need regulations, even though they don’t want them. Why don’t they want them? Because they can rip-off the naïve or engage in undesirable activities.

To me, it’s like privacy. Who worries about governments tracking and tracing everything we do? Those who don’t want to be tracked and traced. Does it bother me if Google reports my searches to the NSA, FBI and CIA? Not really, as I’m not searching for anything viewed as undesirable, illegal or criminal. Just as with privacy, cryptocurrency is the same, and regulations are coming whether the crypto folks like it or not.

There’s regulated exchanges to trade cryptocurrencies and regulated institutions to store cryptocurrencies (if you aren’t a cold wallet expert). In fact, as I postulate regularly, a future global currency will come and it will probably be a digital currency backed by the G20 imho. In fact, this month’s Finance & Development magazine discusses all of these things in-depth:

Will digitalization redefine money? We explore the possible consequences, good and bad.

Traditionally, money has always been an expression of sovereignty, writes Harold James of Princeton University—even if states at times failed spectacularly to guarantee its value. Today, most experts agree that so-called cryptocurrencies do not possess all the core attributes of money. But they also believe that distributed ledger technology (which underpins such assets) has the potential to transform payment services by removing the need for an intermediary. This would reduce the role of central banks and weaken state authority over the money supply. Indeed, that was the political motivation behind Bitcoin, the first decentralized digital currency.

Swedish central bank governor Stefan Ingves points out that, at present, only 13 percent of transactions in his country are settled with cash. If banknotes and coins have had their day, then soon the public will no longer have access to a state-guaranteed means of payment. That is, unless central banks redefine their role. One possibility would be for central banks to issue their own digital tokens—a solution that would require careful consideration of choices and policy trade-offs, says the IMF’s Dong He.

Worries about the misuse of financial technology should be weighed against its potential benefits to society. IMF Managing Director Christine Lagarde offers the following advice: “Above all, we must keep an open mind about crypto assets and financial technology more broadly, not only because of the risks they pose, but also because of their potential to improve our lives.”

Alongside this are some other interesting articles I picked up today.

For example, the Feds ran a bitcoin-laundering sting for over a year. The conclusion, according to Homeland Securities Investigations Special Agent Charge Angel Melendez is that the open nature of the blockchain made it difficult to hide drug money. “The biggest selling point for the blockchain is that it’s transparent. Everybody can see it. And we can see it, too.”

So much for most cryptocurrency being used for money laundering. For example, after the 2015 Paris attacks, a barrage of headlines popped up claiming Bitcoin was being used by ISIS. But, Europol published a report citing there was no evidence to link ISIS to Bitcoin. In fact, from a terrorist financing perspective, the big culprit in the recent Paris attacks was prepaid cards, an industry that was projected by Mastercard to be over $820bn in 2017.

Another recent report from the joint bitcoin analysis team of Ellicit and FDD, has shown that less than 1% of all bitcoin transactions involve money laundering. A report by the UK Treasury noted the risk for bitcoin to be a low, if not the lowest risk for money-laundering, when compared to other methods. A 2017 U.S. Department of Justice Drug Enforcement Administration report stated that China is the pivot point for many money-laundering schemes (they would wouldn't they?).

And criminals are starting to realize that cryptocurrencies aren’t anonymous as their transactions are very public, traceable, permanent and provide a substantial source of data for analysis. So why would you use them for illegal activities, when everyone can see what you’re doing?

This is why the IMF has concluded that cryptocurrencies “do not appear to pose risks to financial stability,” in a report published in April 2018:

“It is impossible to know the extent to which crypto assets may transform the financial infrastructure and whether most new crypto assets are likely to disappear as in past episodes of technological innovation (as many tech companies did during the boom of the late 1990s, for example). Before they can transform financial activity in a meaningful and lasting manner, crypto assets will first need to earn the confidence and support of consumers and financial authorities.”

The IMF report backs the Financial Stability Board (FSB) view when Bank of England governor Mark Carney, who leads the FSB, told the G20 in March that crypto assets “do not pose risks” to the world’s economy.

IMF chief Christine Lagarde wrote in an official blog post that “a judicious look at crypto-assets should lead us to neither crypto-condemnation nor crypto-euphoria”. Agreed.

The other really useful link I received today is to PWC’s latest analysis of ICOs. The report states that “since our last report in December 2017, ICOs have gained further momentum and are emerging as a workable, alternative form of crowdfunding”. It shows that offshore tax havens like the Cayman Islands and British Virgin Islands are ICO heavens, or is that havens, whilst regulated markets are catching up with the USA, UK, Singapore and Switzerland floating near the top, closely followed by Estonia and Lithuania. Equally, Malta, Liechtenstein and Gibraltar are all vying to be seen as ICO hubs.

Funnily enough, when I think of money laundering, I also think of tax avoidance. Strangely enough, places like the Caymans, BVIs, Switzerland, Malta, Gibraltar and Liechtenstein are great places to orchestrate such legitimate corporate schemes, unlike those terrible money launderers.

Purely coincidence of course. After all, if it is regulated, embraced by the financial system and backed by governments, it is all legitimate and above board isn’t it? It’s only if it is unregulated, outside the financial system and backed by networks that it’s illegal.

Chris Skinner Author Avatar

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog,, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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